U.s. Banks Are Throwing Away Your Money On Long Shots

August 7, 1985|By Dick Marlowe of the Sentinel Staff

When a racetrack gambler makes a bad bet and loses half his grocery money, he has a big problem. Not only has he blown the money that was supposed to buy food, he also has to explain why he didn't bring home the bacon.

Faced with that bleak scenario, a lot of gamblers take the remaining grocery money and bet it on another horse. Usually, they bet on a long shot -- because betting on the favorite won't get them back the money they lost on the first bad bet. They often go home without any grocery money at all because their judgment had been altered by getting themselves into a deep hole in the first place.

U.S. banks have been doing that for some time now, having started by taking huge losses on bad loans back in the 1970s. Many bankers, trying to recoup the money lost on the bad loans, started thinking like losing gamblers. They started to make worse loans -- many of them to the so-called developing nations that never developed.

Back in 1929, we got the job done all at one time. We closed all the banks and started over again. In the 1980s, we are closing the banks one at a time. Every time another bank goes down the tube, we have a learned cadre of well-trained spokesmen telling us not to worry -- that the bank-of-the-day failure is an isolated case.

Barnyard language!

The case in point for this week is BankAmerica Corp., which announced Tuesday a reduction in its quarterly dividend from 38 cents a share to 20 cents a share. The culprit: a deteriorating loan portfolio that left the bank with a $338 million loss in the second quarter alone.

Last year, the United States had 79 bona fide bank failures -- the most since the Great Depression. Last week, Riverside National Bank of Houston, with $16 million in deposits, became the latest fatality when the U.S. comptroller of the currency closed it. This year's failures already total about 60, so it appears a certainty that the 1984 mark will fall.

The Federal Deposit Insurance Corp., the receiver in the Riverside failure, is getting weary of that role, but fewer and fewer large banks are willing to rescue failed banks through mergers.

The experts will throw a lot of jargon at us in explaining what is going on, but one of the problems is that banks have started to bet on the long shots, forsaking the old favorites in favor of the dark horses with the longer odds. Small wonder that individuals who are asked for 200 percent collateral on loans get a mite upset when they read about huge loans granted to foreigners. Latin American countries alone owe $360 billion -- most of it to U.S. banks.

You know banks are getting into serious trouble when the expression ''loan-loss provision'' starts to pop up often in quarterly reports. It is happening now, just as it did in the early 1970s when real estate investment trusts were all the rage and banks were handing out toasters in the lobby and bad loans in the commercial loan office.

While the majority of failures involve small banks, the giants are beginning to wobble noticeably. BankAmerica attributed its latest quarterly loss primarily to a $892 million loan-loss provision that it said was made necessary by bad conditions in agriculture, shipping, commercial real estate and loans to foreign countries -- obviously it was saving the best for last. Analysts estimate that about a third of the loan write-offs involved foreign credit.

It was just a year ago that Continental Illinois Corp. reported a record quarterly loss of $1.16 billion and had to be bailed out by the government.

The lesson that America's banks simply cannot seem to learn is that a loan at 11 percent to someone who will pay it back is infinitely better than a loan at 18 percent to someone who cannot or will not pay it back. Another point bankers seem to miss is that it isn't their own grocery money they are gambling with -- it's their depositors'.